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01 September 2010

Smartphones and emerging opto markets drive rapid increase in profits

IQE plc (AIM: IQE, the “Group”), the leading global supplier of advanced wafer products and wafer services to the semiconductor industry, announces its Interim Results for the half year ended 30 June 2010.FINANCIAL HIGHLIGHTS

Dr Drew Nelson, IQE Chief Executive, commenting on the results said:“IQE has delivered record results for the first half of 2010 and our strong operational gearing has turned 54% growth in revenues into a 184% increase in EBITDA. “Our focus remains on exploiting our powerful intellectual property to deliver innovative and high-quality products to rapidly growing markets. The second half of 2010 has started well with strong demand across our full range of advanced semiconductor products leading us to have every confidence in both the short term and long term prospects of the business.”

INTERIM RESULTS 20101. OVERVIEW IQE is the world’s leading supplier of advanced wafers to the semiconductor industry with a strategy that focuses on developing and maintaining IP-rich technologies for high-growth, high-volume markets. The Group has developed a unique set of competitive advantages to provide its customers with world-leading epitaxial wafer foundry services. By delivering these advantages both consistently and globally, and through its strong operational performance, IQE has become the undisputed leader in its field. IQE manufactures bespoke compound semiconductor wafers for major chip manufacturing companies, which use these wafers to make the chips that form the key components of virtually all high-technology systems. IQE is unique in being able to offer the industry’s broadest product portfolio using the widest range of production platforms available today. Products from the Group are found in many existing and emerging consumer, communication, computing and industrial devices, including mobile handsets, tablet and personal computers, Wi-Fi, WiMAX, GPS, and satellite receivers and transmitters. IQE’s products also provide the unique optoelectronic properties used in an increasing number of applications including high-speed communications, optical storage and finger-navigation components. Emerging markets for IQE’s products include laser projection, optical connectors, finger navigation, ultra-high-brightness light-emitting diodes (UHB LEDs) for solid-state lighting (SSL) and high-efficiency concentrator photovoltaic (CPV) solar cells.2. RESULTS Revenues grew by 54% to £33.0m (H1 2009: £21.4m), primarily driven by strong demand for smartphone products during the first half of the year supported by accelerating growth in optoelectronic and advanced silicon components. Gross profits increased by 93% to £7.3m (H1 2009: £3.8m) with gross margins improving from 17.8% to 22.2%. Selling, general and administrative expenses were unchanged at £4.6m (H1 2009: £4.6m) and therefore reduced as a percentage of sales from 22% to 14%. EBITDA increased by 184% to £5.4m (H1 2009: £1.9), demonstrating IQE’s highly operationally levered business model. Operating profit increased by £3.5m to £2.7m (H1 2009: £0.8m operating loss), which after an interest charge of £0.5m (H1 2009: £0.5m) delivered a pre-tax profit of £2.2m (H1 2009: £1.4m loss) The Group had no tax charge during the period, reflecting the benefit of the substantial tax losses at its disposal. These tax losses will enable IQE to shelter in excess of £100 million of future taxable profits. Therefore, retained profit for the period was £2.2m (H1 2009: £1.4m retained loss). Earnings per share were 0.50p (H1 2009: loss of 0.31p), with adjusted EPS of 0.60p (H1 2009: loss of 0.23p). On a fully diluted basis, adjusted EPS were 0.54p (H1 2009: loss of 0.23p). Cash inflow from operations increased by £1.8m to £1.9m (H1 2009: £0.1m), even after the absorption of £3.1m (H1 2009 : £1.7m) into working capital as the business continued to grow Net debt stood at £15.6m (H1 2009: £19.0m), resulting in a year-on-year reduction of £3.4m. 3. STRATEGY IQE’s strategy remains focused on delivering market leadership in high growth markets, protected by technology leadership and intellectual property. IQE has been successful in establishing a clear leadership position in the high-growth wireless communication market, which currently accounts for 75% of sales. Through innovation and technology leadership, IQE is replicating this success in a number of emerging high-growth markets including VCSEL technology (for applications such as finger navigation and optical USB), CPV solar technology, high-efficiency solid-state light sources and advanced lasers (for applications such as pico projectors and high density optical storage). IQE’s success in the market reflects it focus on its customers’ needs. IQE has been successful in differentiating its service by developing a powerful set of USPs, which include:

a complete range of IP rich products covering all major applications;

global multi-site production capabilities in the primary manufacturing platforms to allow efficient capacity planning and for disaster scenario contingency;

maintenance of a broad contact base and global presence with access to all the key global markets;

delivery of benefits from economies of scale including purchasing power and research and development efficiencies;

sharing of best practices and innovation across the group to deliver improved operating and cost efficiencies; and

provision of surge capacity to meet the expected growth in demand in the mobile device sector and other high-volume activities.

This strategy has continued to deliver robust results despite the global economic downturn and will continue to deliver on current and next-generation products. In addition, IQE is able to leverage its substantial manufacturing capacity to deliver tangible benefits to customers, shareholders and other stakeholders. 4. PRODUCTS IQE has a well-established track record in developing, protecting and commercialising its intellectual property and its product roadmap continues to be driven by trends in four key technology areas, all of which have high-growth, high-volume prospects: Wireless: The acceleration of the adoption of advanced, high-speed mobile communications, including 3G, WiFi, GPS and other wireless technologies. As mobile technologies continue to advance at a rapid pace with new features constantly emerging, the role of advanced compound-semiconductor materials such as GaAs has become critical in enabling high-speed data processing, while maintaining low levels of power consumption. IQE’s products are critical in the drive to 3G and beyond, along with the need for backward network compatibility. They enable the speed and power to accommodate features such as high-resolution imaging, video, high-speed wireless data access, VoIP and satellite navigation. Today’s high-speed devices contain many more GaAs components than previous generations. Opto electronics: Consumer demand for faster and more flexible means of communication is driving a number of high-growth, high-volume applications that depend on compound-semiconductor technology. This includes optical cables (such as optical USB and Intel’s Light Peak), finger navigation for mobile devices, and laser projection systems. Optical cables are widely expected to displace the copper cables used to connect computers, TVs and peripherals. IQE is the world leader in VCSEL technology (Vertical Cavity Surface Emitting Laser), which lies at the heart of optical cables and finger navigation. Laser projection is also viewed as one of the most exciting applications of optoelectronic technology, with first-generation projectors already being incorporated into mobile handsets and cameras. VCSEL technology is already beginning to replace mechanical trackerball designs for finger navigation in mobiles phones. It is widely expected that penetration of this technology will grow rapidly. Cleantech: Demand for IQE’s products will be driven the move towards clean, efficient and sustainable energy sources (solar cells), and highly efficient light sources (LEDs) in order to reduce the impact of global warming, reliance on fossil fuels and provide a much cleaner environment. Compound semiconductors are playing a critical role and IQE is involved in leading-edge development of materials for these applications, including solar-cell technologies that are achieving record levels of energy conversion. Electronics: The continuing need for higher-speed, more powerful microprocessors and higher-speed, ultra-high-density memories is driving the demand for new materials solutions based on silicon substrates including the incorporation of compound semiconductors directly onto silicon substrates. In response, IQE has developed a new range of engineered substrates such as Germanium on Insulator (GeOI) for next-generation integrated circuits and devices. IQE has established powerful positions in both technologies, working with some of the biggest names in the industry. The wireless market currently provides the Group with high-volume sales and the expectation of continued high growth. However, the other markets are undergoing rapid development and offer further near-term, high-growth potential and product diversity.5. MARKET DEVELOPMENT IQE’s markets fall into the broad categories of wireless, optoelectronics, and electronics.Wireless Wireless products include a wide range of components used for radio frequency (RF) communications in mobile handsets, smartphones, personal computers, tablet PCs and a host of other mobile devices. Mobile technologies are currently used by more than half the world’s population, with industry analysts predicting handset volumes to increase to around 1.3bn in 2010 and 1.6bn by 2013. Growth of smartphones which employ significantly higher gallium arsenide (GaAs) content than standard handsets, is expected to account for 19% of all handset sales in 2010, increasing to over 50% by 2014. Growth in compound semiconductor demand is further driven by new applications for WiFi such as machine-to-machine, point-to-point and tablet PCs as well as network operators introducing low-end 3G products to migrate their customers to 3G networks, effectively increasing the compound semiconductor chip content in low-end handsets. The compound semiconductor content in smartphones is continuing to grow and ranges from $2 to $4 in low-end handsets up to $9 in sophisticated high-end devices. IQE is in production with all leading wireless chip companies and was recently awarded “TriQuint’s supplier of the year for 2010” based on production support and development of new products. TriQuint is known to supply the majority of wireless chips for a number of smartphones including iPhone, Samsung Galaxy, HTC 4G EVO and the Blackberry Tour. Other customers have significant content in RIM, Samsung and other leading handset manufacturers with IQE providing BiHEMT wafers for better power performance and longer battery life. Wafer inventories remain at low levels throughout the supply chain with no evidence of inventory build-up.Optoelectronic Optoelectronic components cover a broad range of applications including data communications, consumer applications, solid state lighting and CPV solar cells. Optical fibre communications have been used for many years for long-haul voice and data communications. Today’s PCs and peripheral devices are increasingly data hungry to the extent that communications between such devices require the same capacity that just 10 years ago would have been sufficient to carry over one million voice calls across the Atlantic. Over the next four years, optical cables are predicted to replace copper cables for interconnecting a wide range of devices. Demand for semiconductor lasers (VCSELs) is anticipated to grow from around 1m units in 2009 to over 650m units in 2014. In addition to optical communications, VCSELs are beginning to be deployed as finger-navigation devices by a number of leading handset manufacturers such as RIM, LG, Samsung, Sony Ericsson and HTC. Data storage devices (from CDs to Blu-ray discs) utilise lasers and optical detectors made using semiconductor wafer products. The storage capacity of a digital recording disc is determined by the wavelength (colour) of light emitted by the read/record laser with audio/data CDs operating at the red end of the spectrum and Blu-ray at the blue end. Modern devices such as Blu-ray HD video and games consoles employ multiple laser components to allow backward compatibility. Shipments of Blu-ray optical storage devices are expected to grow from 40m units in 2009 to over 200m units in 2012. Red green and blue lasers are also used to generate images in an emerging range of pico projectors. It is anticipated that pico projectors will become commonplace within handset and tablet PCs within the next five years in the same way that cameras have become during the last five years. The drive for sustainable generation of electricity is expected to yield a mix of alternative power options over the coming years within which solar energy is likely to emerge as a key source of renewable energy. IQE’s technology provides the material for the most efficient and cost effective solar cells for power generation in the form of CPV solar cells. Industry analysts estimate that less than 0.5% of current electricity is generated by solar power but predict that this will increase to 64% in 2100. IQE is uniquely positioned as high-efficiency solar power emerges over the coming years. Closely linked with sustainable power generation is the move towards high efficiency lighting which also uses IQE’s wafer technology. Over 20% of the world’s energy consumption is taken up by lighting. A key driver for the adoption of alternative lighting technology will be the almost universal banning of incandescent lighting technology from 2012. LED Solid State Lighting is emerging as the major technology to displace existing lighting, which dates back over a century. The market for ultra-high brightness LEDs is expected to grow from less than $2Bn in 2009 to over $4Bn by 2012.Electronics The ever-increasing demand for higher speed and improved performance from today’s electronic devices is ushering in a new era of semiconductor materials that combine the versatility of silicon, which has been the default semiconductor material for the last half century, with the power and performance of compound semiconductors that have emerged as true 21st century materials. 6. TRADING OUTLOOK Growth in demand for IQE’s products during the first half of 2010 was largely driven by the increasing demand for wireless components used in smartphone and tablet PC technologies, which contain a significantly higher content of gallium arsenide (GaAs) products than previous generations of handheld devices. Smartphones represent a fundamental structural shift in mobile communications and will still only account for 19% of the total handset marketplace in 2010. The Group sees the annual growth rate of 30-40% continuing for several years to come. In addition, the proliferation of wireless applications such as with smart meters and point to point communications will add further demand for IQE’s wireless products. Demand for wireless products is strongly supported by accelerating growth in demand for optoelectronic devices across a range of exciting new technologies and applications, including finger navigation, short range data communications, lasers for projection, high efficiency LEDs and CPV materials for advanced solar energy generation. Significant growth is also occurring in IQE’s silicon based product division with the adoption of new engineered substrates launched in 2009 such as Germanium on Insulator (GeOI) and Silicon on Sapphire (SOS) for next-generation integrated circuits and high speed devices. The second half has begun well, with sales now anticipated to be ahead of expectations as a result of a strong performance across all of the Group’s product ranges. The continued successful implementation of the Group’s strategy combined with strong operational performance give the Board every confidence in both the short term and long term prospects of the business. Dr Drew Nelson CEO

Note to Editors IQE is the leading global supplier of advanced semiconductor wafers, with products that cover a diverse range of applications, supported by an innovative, outsourced foundry services portfolio that allows the Group to provide a 'one stop shop' for the wafer needs of the world's leading semiconductor manufacturers. IQE uses advanced crystal growth technology (epitaxy) to manufacture and supply bespoke semiconductor wafers ('epi-wafers'). The world’s major chip manufacturing companies use IQE’s wafers to make the leading-edge components which form the heart of virtually all of today’s high-tech devices. IQE is unique in being able to supply wafers using all of the leading crystal growth technology platforms and has developed and maintained significant intellectual property in relation to its products and services. IQE's products are found in many leading-edge consumer, communication, computing and industrial applications, including a complete range of wafer products for the wireless industry. Our technology is an integral part of mobile handsets, particularly smartphones, wireless infrastructure, Wi-Fi, GPS, and satellite communications. The unique optoelectronic properties of IQE’s materials are also found in applications including optical communications, optical connectors, optical storage, laser printers/copiers, thermal imaging, leading-edge medical products, finger navigation devices and ultra high brightness LEDs. IQE’s expertise also extends to a variety of advanced silicon based systems and high-efficiency concentrator photovoltaic (CPV) solar cells. The epitaxy production process is complex and highly specialised. As such, chip manufacturers are increasingly seeking to outsource wafer production to specialist foundries such as IQE in order to reduce overall wafer costs and accelerate time to market. The Group is also able to lever its global purchasing volumes to reduce the cost of raw materials. In this way IQE's outsourced services provide compelling benefits in terms of flexibility and predictability of cost, thereby significantly reducing operating risk. IQE also provides bespoke R&D services to deliver customised materials for specific applications and offers specialist technical staff to manufacture to specification either at its own facilities or on the customer's own sites. IQE operates six manufacturing facilities located in Cardiff (two) and Milton Keynes in the UK; in Bethlehem, Pennsylvania and Somerset, New Jersey in the USA; and Singapore. The Group also has a dedicated R&D facility in Bath, UK and operates 11 sales offices located in major economic centres worldwide.